Tagged: Consumer Loan

Nita and Meerak, a young couple working in a BPO in Bangalore, used a water cooler at their home each summer. But with the rising heat and diminishing water supply at their place, they planned to purchase an air-conditioner (AC) for the bedroom.

During one of the weekends, they visited a popular electronic store in the mall near their house. But to their dismay, they realised that they did not have enough savings for purchasing the desired AC, as it was costing significantly higher than their budget. The young couple decided to postpone their AC purchase for another year and confided to the sales person at the store that it is out of their budget at the moment.

The sales person at the store then counselled Meerak and Nita on the available finance opportunities at the store which they could avail for purchasing the much needed AC. There was an in-house counter of a leading personal finance company at the store itself where the two went to understand the terms and conditions of the consumer durable loan for purchasing the AC. On discussing with the finance company representative, Nita and Meerak were pleasantly surprised to know that they could instantly avail a loan for purchasing the AC at feasible terms and conditions and take it home the same day.

Meerak then filled the loan application form and provided all the requisite details and proofs. The finance company representative instantly checked Meerak’s CIBIL TransUnion score on his computer. He found Meerak’s CIBIL TransUnion score satisfactory as it aptly met the company’s lending criteria for consumer durable loans. He then explained to Meerak and Nita that because Meerak had a high CIBIL TransUnion score and a good credit history, the finance company was able to provide them finance for purchasing the AC instantly.

Having worked in a financial BPO, Meerak had an understanding of the importance of a good CIBIL TransUnion score and a healthy credit report for availing credit cards and home loans. But only now did he realise the larger role that the CIBIL report and CIBIL TransUnion score played in his life. Due to a good CIBIL TransUnion Score, he and his family could now immediately enjoy the comfort of an AC without having to wait for another year to purchase the same.

Having experienced the benefit of financial discipline and a good CIBIL TransUnion score, the couple resolved to continue to maintain a good credit history and set down some ground rules on managing finances.

Here are a few things to remember:

1) Keep track of all loans and credit card EMIs: Keep a regular check on all the loans and credit cards and ensure that you make the payments before the due date every month.

2) Set payment alerts: In order to better manage payments of credit card bills, set up an alert on phone and email so that you are reminded of the dues even if you forget.

3) Keep track of guaranteed loans: If you have guaranteed a loan, do ensure that the payments on this loan are being made regularly and there is no delinquency or default on them. The guarantor’s CIBIL TransUnion score gets impacted if there is a delinquency or default on the loan repayments by the principal borrower.

4) Review CIBIL report and CIBIL TransUnion score: Before applying for any loan, credit card or finance for electronic goods, do make sure that you check your CIBIL report and CIBIL TransUnion score. This practice will help you avoid any unpleasant circumstances in the form of loan rejection. You can always work towards improving your credit history and CIBIL TransUnion score in case it is low and apply for loans or finance opportunities once it improves.

It is important to understand that a good CIBIL report and CIBIL TransUnion score is very critical for having access to finance when you need it. With availability of instant credit information and score from CIBIL, finance companies are able to assess an applicant’s credit discipline and are able to sanction the loan immediately. A good CIBIL report and a high CIBIL TransUnion score can be your gateway to building a prosperous future.

Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.

NEW DELHI: State Bank of India (SBI) on Wednesday reduced interest rates on loans for car and consumer durables and also decided to lower processing charges to cash in on the festival season demand.

SBI is the fourth bank after PNB, OBC and IDBI Bank to offer special interest rates for loans to buy automobiles and consumer durables like televisions, air conditioners and refrigerators.

The decision to cut interest rates on auto and consumer durable loans comes nearly a week after the government decided to pump in funds in PSU banks so that they can lower rates to stimulate demand in the targeted sector.

According to the country’s largest bank, interest rate on car loan has been slashed by 0.20 per cent to 10.55 per cent against the earlier 10.75 per cent.

“Processing charge has also been cut from 0.51 per cent of the loan amount with a minimum of Rs 1,020 to a flat rate of Rs 500,” it said.

The bank has also launched a special festival loan for its salary account holders for purchase of consumer durables and two-wheelers.

Attractive discounts are available under this offer resulting in effective interest rates starting from 12.05 per cent, it said.

This ‘Utsav Ki Umang SBI ke Sang’ offer is valid from October 7, 2013, to January 31, 2014, and covers the purchase of cars, two-wheelers and consumer durables, it added.

The Reserve Bank of India has come down heavily on zero per cent or discounted interest rate schemes, and wants them stopped as it feels that consumers have been fooled by such schemes into believing that bank funding comes for free. “Such schemes only serve the purpose of (luring) and exploiting vulnerable customers,” it said in a confidential note to banks just a few days ago.

The central bank has also barred banks from charging discriminatory interest rates on loans for all product categories that don’t attract the zero per cent facility. It wants to stop the current practice where financing takes place on the maximum retail price of the product and not the market price, and wants banks to pass on benefits they get from retailers and brands to consumers.

Industry experts have welcomed the RBI move, but some of them have started questioning the timing of these measures as they believe that such schemes were driving the sales of consumer durables even in a dull economy, but sales may take an instant blow following the central bank’s move, particularly when the festive season is just round the corner.

Surprisingly, even consumers looking to buy consumer goods on easy monthly installments seem to be enjoying such schemes. After all, where else could they find a chance to stagger their payment without paying any interest on the loan amount?

However, before going overboard, you need to know the real cost of such schemes and also how do these schemes work.

“Zero percent finance schemes are quite popular with consumers, and companies use them in an efficient way to attract customers to make purchases, especially for consumer durables, during the festive season,” says Anil Sahgal, director, MAGI Research and Consultants, and co-founder of personal finance consulting portal ‘i-save’.

He says the festive season is a critical sales period for most consumer durable companies and the zero percent schemes play an important role in effective sales promotions. Since most customers do not understand the total cost of the scheme, they happily go for it as it seems like a genuine discount.

“You should, however, always remember that there is no free lunch in life. Therefore, contrary to the common perception, all the parties involved benefit out of such schemes. There is nothing like ‘zero’ or ‘free’ in anything you buy. Similarly, zero interest is nothing but higher discounts that the concerned company or manufacturer offers to the bank or the lender or the financier who in turn passes it on to the end buyer,” says a Mumbai-based financial planner.

These schemes are typically offered by finance companies or NBFCs in conjunction with a manufacturer or dealer network. The schemes basically offer a ‘zero percent’ finance, where a customer typically pays for the financing cost in an indirect manner. The indirect cost will include, for example, paying a processing fee and a significant amount as advance EMIs in addition to the minimum cash down payment. The biggest cost, however, is forfeiting a cash discount which might be available on a cash purchase.

For example, suppose Gopal wants to buy an LCD TV for Rs 36,000. At a major retail store, there is a cash discount of Rs 2000 available on the LCD. However, Gopal does not wish to pay the whole amount cash down and also does not want to spend on his credit card where the interest cost would be high. To avail of the scheme, Gopal will need to pay a processing fee of about Rs 1,000 to the NBFC. He will also have to forfeit the cash discount of Rs 2,000 since the discount is not available on a finance deal. Now, on a loan of 12 months, Gopal will have to pay 4 EMIs in advance, i.e. 36,000 / 12 X 4 = Rs 12,000. So, effectively Gopal has got a loan for Rs 24,000 only. His total cost of taking the loan was Rs 3,000 (processing fee + forfeiting the cash discount). So for 8 months, Gopal paid Rs 3,000 on a loan of Rs 24,000, paying an effective interest rate of 18.75% annualised.

Thus, it goes without saying that “there is more than what is being communicated. It is more of a marketing activity with attractive packaging, rather than providing any real service to the customer,” says Kavi Arora, MD & CEO, Religare Finvest Ltd.

Therefore, buyers who can afford to buy with their own resources should not get lured by such schemes simply because they appear attractive. However, if you must go for any zero finance scheme, you need to take some precautions. For instance, you must check the amount of processing fee to be paid besides checking the advance EMIs required. Also, compare the total cost of the zero finance scheme with the interest cost if any other loan was taken to finance your purchase, e.g. a personal loan by your bank or on your credit card.

“Customers must be aware of the details of the scheme and make an effort to compare these with other options for borrowing. If a customer has a good credit history and is able to establish a personal loan with his or her bank, it may be available at a much lower cost than the effective cost of a zero finance scheme. Also, with a personal loan, a customer has no restrictions on the choice of the product,” says Mr Sahgal.

Thus, you should zero in on any zero percent finance scheme only if you are not being charged extra in the name of fees and charges, and if the cost of the product is the same without finance options. If not, it is better to look for some other options!

Before signing up for such a deal, understand that there is nothing as a 0% interest deal
Vivina Vishwanathan |First Published: Tue, May 28 2013. 07 02 PM IST | Live Mint|

On a Sunday afternoon Krishna Daswani, assistant vice-president (programming), Zee Entertainment Enterprises Ltd, walked into Croma, Tata group’s consumer durable and electronics chain, at High Street Phoenix Mills in Mumbai to buy an iPhone—a product that he had eyed since 2007. This time there were two differences since 2007. One, it was the latest version from the Apple stable, the iPhone 5, and two, he could buy it on an installment plan. Says Daswani, “I have the money to make the complete payment right now. However, payment in installment looks easy on pocket as I have to pay it over a period of time.”

We’ve all faced this dilemma because since January this year, we’ve been flooded with the equated monthly instalment (EMI) schemes for smartphone deals. Considering the advertising push of mobile manufacturers and financial institutions, we go behind the buzz and decode the offers.

What’s on offer?

Apple kicked off the deal mania when it began the EMI scheme on iPhone 5 in December. Samsung immediately followed suit and aggressively started marketing the staggered payment scheme on selected products. On 24 May, BlackBerry stated that it would sell BlackBerry Z10 and BlackBerry Curve 9220 on “easy” monthly instalments. The schemes vary for each model and brand, but the essential feature is a staggered payment plan wherein you pay for the phone over a period of months rather than at one go. There are various options for different products on offer. For example, you need to make a downpayment of Rs.16,990 upfront for a 16 gigabyte iPhone 5 that costs Rs.45,500. The remaining Rs.28,510 can be paid through EMIs of Rs.4,752 for six months or a 12-month deal wherein you pay Rs.2,376 each month.

Another offer allows you to make the entire payment through EMIs making no downpayment, but these have a processing charge sitting on the cost. Samsung is seeing the deal do brisk business for phones including Samsung Galaxy Note II, Samsung Galaxy Grand and Samsung Galaxy Note 800.

Says Himanshu Chakrawarti, chief executive officer, The MobileStore Ltd, “At present, almost 30% of our smartphone sales come through EMI.” Anything that breaks a larger number into smaller bits makes a deal look cheaper. But is it really so? Read on to find out.

Processing fee

Though the mobile manufacturers and the banks advertise that there is no processing charge, if you read the fine print you will find that banks have started charging a processing fee on select smartphone products and for select tenor. Processing fee adds to the cost and makes the 0% interest claim false. It varies from bank to bank and even store to store. In the Mumbai outlets of The MobileStore, an Essar-group owned mobile handset and accessories chain, you will find the list of processing charges for each bank.

The average processing charge is in the range of 1.00-8.75% on the principal amount for three months to nine months period. So for a phone costing Rs.45,500, the processing charge can go as high as Rs.3,982, or 8.75%. Also it varies across tenor. So check with the store and the bank about the details of the processing charge. Chances are that the companies that recently started offering this service will give you a better deal. Ask the question: Is there a processing fee for this deal and how much it is?

Payment option matters

Payment option can also make a difference to the final cost of the phone. Initially you could go for these schemes only through credit cards. But now companies are providing these schemes on debit cards as well. Says Devang Mody, president-consumer business, Bajaj Finserv Lending, “Many financial institutions do this as they can use up the customer’s credit limit for the EMI.”

So if you are using your credit card for a purchase of Rs.45,000 and you credit limit was Rs.1 lakh, it will get reduced to Rs.55,000 till the amount is cleared. Since March, Bajaj Finserv has been providing the scheme on debit card with no processing charges as of now.

The scheme varies from credit card to credit card too. An HDFC Bank Ltd credit card, for instance, gives you an “at no extra cost” offer. At present there is no processing charge on this scheme on certain models. An ICICI Bank Ltd credit card offers a cashback offer on the same Samsung smartphone that gives you a cashback of Rs.5,665 on your credit card if you purchase a phone for Rs.37,900. But remember that only certain ICICI Bank credit card customers will be eligible for this (cashback) offer.

The card you swipe matters for lower processing fee too. For instance, on the same product Axis Bank Ltd charges a processing fee of Rs.3,791 for a 12-month EMI while ICICI Bank charges Rs.4,163 for the same period. However, if you swipe HDFC Bank card you will get the lowest processing charge of Rs.3,640.

If you are using your card to buy, ask the question: What is the benefit or cost of this deal if I use my credit card? Name your card to make sure you get the right deal.

Compare for best pricing

If you buy a phone on EMI the salesman will sell it to you at the maximum retail price (MRP). However, if you buy it with cash down, most retailers sell it below MRP. You get a discount of 3-5%. Also you can get a cheaper deal at online shopping sites such as Ebay.in and Snapdeal.com compared with the retail outlets. Says Tony Navin, vice-president—business development, Snapdeal.com, “Online retailers will give you a cheaper deal as there is no cost overheads such as rental and inventories and hence the benefit can be passed on to the consumer.” Says Mody, “Processing charges and pricing depends on the manufacturers need to sell the product. If he (manufacturer) wants to get rid of a certain product, you may get a cheaper deal. Also it depends on the business proposition between the manufacturer and the financial services provider.”

Always remember that haggling, even at fancy looking stores, always gets you a lower price.

What should you do

Convergence Catalyst, a research firm, estimates that smartphone sales will be in the range of 44 million to 48 million in 2013 in India compared with 20 million to 22 million in 2012. And some of these sales will be nudged through the EMI route.

Before you sign up for such a deal, understand that there is nothing called a 0% interest deal. You will pay, one way or another. If the deal still works for you, go right ahead and get the phone home.